Geography and Local (Dis)advantage

SummaryThe combination of geographic and economic data has provided increasingly useful evidence to explain the dynamics of information exchange across spatially distinct areas.

However, the tools offered by economic geography have remained a largely under-utilized resource for explaining the specific factors that drive cross-sectional variation in delegated portfolio management. Our primary innovation is to focus on the unique geography-driven characteristics of the municipal-bond market in order to conduct several clear tests on the relationship between geographic location and investment management. We accomplish this by examining only single-state muni-bond mutual funds, which have rarely been included in the existing studies on mutual fund performance. Our results indicate that, in the case of municipal-bond mutual funds, local (i.e., in-state) fund managers perform significantly worse than non-local (i.e., out-of-state) fund managers.In addition to our examination of underperformance of local managers of municipal bond mutual funds, we also provide evidence for several factors that influence the performance of muni bond funds in general and that have not been previously documented (to our knowledge). With this we extend the work of Christoffersen and Sarkissian (2009) by showing that the interaction between being local and being located in a state capital or large city has power to explain performance. However, the location of the fund manager is relatively ineffective in explaining performance compared with using the characteristics of the state in which the fund invests. Expanding on the work of Butler (2008) and Butler, Fauver, and Mortal (2009) we confirm that levels of political corruption, freedom of information, and conflict of interest law influence the performance of muni bond fund managers. We add to this evidence that state